Some companies outsource their payroll to payroll processing entities. Other companies conduct payroll administration and processing in-house. Because of the large amounts of cash involved in payroll, owners and managers may take actions to restrict access to the associated account and the cash in that account. One way companies do this is by setting up and using an imprest payroll account, which provides a dedicated payroll administration account.

Imprest Definition

In accounting, an imprest system typically involves the management and monitoring of petty cash. Companies keep a small amount of cash on the premises in a cash drawer or lock box to use for small miscellaneous expenses. However, the broader definition of imprest involves designating an account or a fund for the payment of particular or miscellaneous expenses. The people in charge of the fund replenish the account with the same amount that was spent. For example, if an imprest account held $500, and $250 was spent, the people in charge of the account would add another $250 to return the total to the original $500. This occurs with an imprest petty cash system and an imprest payroll account.

Definition

An imprest payroll account is an account set up to receive the exact amount of the funds needed to make payroll for a given pay period. No additional funds reside in this account. Once a company direct deposits funds or disburses payroll checks for employees who then cash their checks, the account balance on an imprest payroll account drops to a zero balance. Companies do not deposit any other types of funds into the account.

Audit Ease

The fact that only one type of transaction occurs within an imprest payroll account makes these types of accounts easy to audit. This auditing ease applies to CPA-administered audits for generally accepted accounting principle compliance. It also applies to Internal Revenue Service and state department of revenue tax audits as well as federal agency audits for contract compliance. For example, imprest payroll accounts can benefit government contractors or subcontractors under a cost plus contract who must show proof that they made all contracted payments to project employees.

Pros and Cons

Usage of imprest payroll accounts significantly reduces the risk of fraud or embezzlement because only payroll funds flow in and out of these accounts. Personnel can only cash payroll checks tied to verified W-2 employees against an imprest payroll account, eliminating the potential for fake vendors. However, companies must closely administer these accounts. The balance returns to zero once all checks clear, but occasionally an employee neglects to cash a check for several months, resulting in a non-zero balance. The account administrator may be tempted to withdraw the excess funds, which could lead to an overdrawn account should the missing check surface.

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About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.